In many small businesses, the key to success depends on how well you can distribute your product. For example, if your company's products are retail items — such as food items, apparel, or kitchen appliances — you will likely want to find an experienced distributor with a great sales force and contacts. The distributor may then contract with dealers or large chains to sell your product.
The key to your relationship with the distributor is the Distribution Agreement. Although the distributor will likely prefer to use his own form of Distribution Agreement (which of course will be one-sided in the distributor's favor), consider the following key terms in the negotiations:
- Territory and markets: The contract must clearly describe the distributor's territory or business area. The contract should define the geographic market and customer category. For example, you may want your company to handle certain major customers (like national accounts) directly and the distributor to handle other outlets. Will the territory be broad (such as the entire U.S.) or narrow (such as Hackensack, New Jersey)?
- Exclusive versus nonexclusive: The contract should specify whether the distributor is to have exclusive or nonexclusive rights to the company's products in a particular territory. But be careful here, you don't want to give exclusivity for one territory or market if you face significant risk of lousy performance by the distributor. If you are going to give exclusive rights, consider setting sales goals that the distributor has to meet in order to maintain exclusivity.
- Obligations of the distributor: The distributor's obligations must be spelled out. Ideally, you want a clause that says the distributor must use its "best efforts to market your products," although the distributor will resist this phrase. So, consider setting forth in the contract the specific steps that the distributor must take: contacting all the major potential customers, appointing dealers, preparing marketing material and promotional activities, and so on.
- Trademarks and logos: The Distribution Agreement should prohibit the distributor from using the company's name, trademark, and logos in advertising, point of sale activities, and marketing materials except as provided in the Distribution Agreement or with the company's prior written consent. This restriction is important to ensure that your company's goodwill, reputation, and brand name are not hurt by the distributor's activities.
- Product issues: The contract needs to clearly identify the product or products that the Distribution Agreement covers. The agreement may also cover the issue of product availability, delivery, and allocation of product among other distributors. The Distribution Agreement should also cover how the distributor will handle product inventory and what rights of return will be available.
- Service: You should decide the terms for servicing the product. Will the distributor handle product servicing or warranty claims? Does the distributor have the expertise to do so? How will you compensate the distributor for servicing the product?
- Price: The contract needs to provide a pricing section. Generally, the price follows a schedule or the seller announces the price from time to time. The seller then typically provides an agreed discount to the distributor. You need to maintain flexibility on the price you can charge for your products.
- Payment terms: Industry practices often dictate payment terms. Ideally, you will get an up-front deposit on a distributor's order with full payment due either 30- or 60-days after shipment. Make sure that you are comfortable with the distributor's creditworthiness.
- Contract term and termination: The distributor's term of the appointment and how such a term can be terminated or reviewed are very important issues in a Distribution Agreement. Try to get the right to terminate the contract for any reason, as long as you give at least 60-90 days notice. Such a termination right gives you maximum flexibility to get out of a relationship that isn't working. Also, add a provision that allows you to immediately terminate the contract if the distributor breaches its obligations or becomes bankrupt or insolvent. You must also address the potentially complicated issue of what happens after termination with respect to products, sums owed, and servicing obligations.
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